Detroit may go down in history as the largest city filing for bankruptcy in the US if the court finds the city eligible for Chapter 9 bankruptcy protection. The city is unable to cope with billions of dollars in debt, population flights and loss of tax revenue. The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities. The Voice of Russia discussed this situation with Dr. Richard Wellings, Deputy Editorial Director from the Institute of Economic Affairs in London.

The city’s Emergency Manager Kevyn Orr, who was appointed in spring, hoped to improve the economic situation in 18 months and to save the city from bankruptcy. But already in June it became clear that the task was too tough.

Orr had to introduce a moratorium on some of the city’s debt payments. He also proposed the city’s creditors to agree on smaller compensation, which was 10 cent per dollar. But most of the creditors rejected the proposal.

The recent economic crisis only finished off the economy of Detroit. In fact, economic problems of the city that used to be the symbol of the American and even global car industry, has been for six decades in the making.

In the 1950-s, the development of car industry prompted local car manufacturers to move their production facilities to other states. Over the last 60 years, Detroit, that was the fifth largest city in the country, lost more than half of its population. Today its population is under 700,000.

So far, Stockton, California, topped the list of the US bankrupt cities. The city declared itself bankrupt a year ago due to a sharp decline at the housing market and the debts it had accumulated earlier.

The list of bankrupts also includes Mammoth Lakes and San-Bernardino in California and Jefferson County in Alabama. But it is definitely Detroit that could set an important precedent for financially troubled cities around the US. These cities will be watching what happens in the Motor City for lessons that could apply to them.

Was filing for bankruptcy the only way out in the current situation for the city?

It was getting worse and worse and we saw the decline of the central services, so street lights have been turned off, a lot of areas of Detroit not being policed properly. And also to avoid even more deaths they had to really seek protection from their creditors.

What will the status of city bankrupt will mean for Detroit residents especially for the retired people?

I think we will probably see some further cuts to basic public services in Detroit, that also will destroy confidence among potential investors into the city. So, the problem is it could lead to even more flights of people from Detroit. And the problem is of course people tend to move out, the wealthy residents who pay tax, whereas the very poor residents are stuck in social housing projects will tend to stay and they contribute much to the city tax revenues.

If the court approves Detroit’s bankruptcy petition what will happen to the city after that? What steps will be taken to solve the city’s economic problems?

I don’t see that much can be done really. I mean we might see a massive federal bailout as we saw with New York in the 1970s but there will be obviously restraints because the federal government will be worried that if Detroit goes, other cities will follow, and if they do bailout Detroit, then of course it will produce moral hazard, and the city will spend too much more money and get in the same sort of trouble.

Do we know any similar cases in Europe?

It is rather different in Europe because obviously central government tends to be much stronger in the finance, I mean obviously a lot of cities in Europe would go bankrupt if they have to raise a lot more of their own finances, but you have these huge transfers from central government that are still happening. So, there is much more redistribution in Europe and a local taxation is relatively unimportant in most European countries.

What way out would you see for Detroit because it’s been for several dozen years now that the city has been having pretty similar economic situation, it is not something which is the result of the economic crisis of 2008. It had been much earlier that Detroit had been suffering serious financial losses. So, what could be done for the city to get out of this current economic situation?

It is going to be very difficult but I think there are some key things that could be done. I mean firstly the city should try make itself a really good place for people to do business to attract investments and that means a very low local taxes, making it easy for people to set their businesses there and expand businesses.

But also it should develop a reputation for the governance, the idea that the city governments are going to be responsible in the long-term and not get in the financial difficulties in the future. So, you also need stability and governance there. I think a lot of points it will be hard to deliver.

Detroit filed Chapter 9 bankruptcy in federal court on Thursday. The bankruptcy, if approved by a federal judge, would force Detroit's thousands of creditors into negotiations with the city's emergency manager, Kevyn Orr, to resolve an estimated $18.5 billion in debt that has crippled Michigan's largest city.

"It was like putting a thumb in a dam," said Jodie Holmes, 55, resident of Detroit, as he leaned against an abandoned restaurant marked with graffiti, waiting for a bus to take him to his temporary job.

"I don't know if bankruptcy will help us or drop us to our knees," he added.

The retired autoworker said he had given up hope anything would bring back Detroit.

"Nothing else has worked, so why not try it?" he asked.

Since 2000, Detroit’s population has declined 26 percent. There are now just 706,000 people in the city, way down from 1.85 million during its industrial heyday in 1950.

The official unemployment is now 18.6 percent, and fewer than half of the city’s residents over the age of 16 are working. Per capita income is an extremely low $15,261 a year, which means there’s not all that much tax revenue pouring in.

Low tax revenue, in turn, means that city services are suffering. Detroit has the highest crime rate of any major city, and fewer than 10 percent of crimes get solved. The average response time for an emergency call is 58 minutes. Some 78,000 buildings are abandoned or blighted and there are an estimated 12,000 fires every year. About 40 percent of the city’s streetlights don’t work.

High crime and blight are driving even more residents out of the city. It’s also driving down property values, which means many residents have stopped paying property taxes. The city collected about 68 percent of the property taxes owed in 2011. Both of those things put a further strain on Detroit’s finances.

Detroit owes around $18.5 billion to its creditors. That includes about $6 billion in health-care and life insurance obligations, plus roughly $3.5 billion in pension costs racked up over the years. Given its ever-worsening economic slide, Detroit was in no position to pay off all its obligations.

On Thursday the city of Detroit Michigan in the U.S. became the largest city in US history to file for bankruptcy protection, court documents showed. Once the fourth largest U.S. city, Detroit has seen its population shrink by more than half, from 1.8 million in 1950 to 685,000 today, as crime, flight to the suburbs and the hollowing out of the auto industry have eaten away at its foundations.

State-appointed emergency manager Kevyn Orr asked a federal judge to place the city into bankruptcy protection.

If it is approved, he would be allowed to liquidate city assets to satisfy creditors and pensions.

Detroit stopped unsecured-debt payments last month to keep the city running as Mr Orr negotiated with creditors.

He proposed a deal last month in which creditors would accept 10 cents for every dollar they were owed.

But two pension funds representing retired city workers resisted the plan. Thursday's bankruptcy filing comes days ahead of a hearing that would have tried to stop the city from making such a move.

Mr Orr suggested at the time there was a 50-50 chance of the city needing to file for bankruptcy. He also said the city's long-term debt could be between $17bn and $20bn.

Alongside him, Detroit Mayor Dave Bing said that residents had to make a new start.

"I really didn't want to go in this direction - but now that we are here, we have to make the best of it," Mr Bing said.

The mayor also assured residents that the city would stay open and bills would be paid despite the filing.

"Paychecks for our city employees will continue, services will continue," he said.

In a letter accompanying Thursday's filing, Michigan's Governor Rick Snyder, a Republican, said he had approved the request from Mr Orr to file for Chapter 9 bankruptcy.

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